Consumer Duty: Everything you need to know as regulator prepares for ‘biggest overhaul since RDR’

The Financial Conduct Authority (FCA) will next week publish the final details of the biggest overhaul in UK regulation since the Retail Distribution Review (RDR).

The Consumer Duty will set a new, higher standard for retail financial services firms, with the aim of ensuring ‘good outcomes’ for savers and investors

The new Consumer Duty is set to come into force in April 2023, although the regulator has faced calls from some quarters to delay implementation.

In advance of that AJ Bell has provided a Q&A that sets out everything you need to know ahead next week’s announcement.

Tom Selby, head of retirement policy at AJ Bell, said: “It is hard to overstate the potential significance of the FCA’s Consumer Duty reforms for the entire retail financial services industry.

“The new Duty will require all retail financial services firms to aim to achieve ‘good outcomes’ for customers, effectively replacing the existing requirements to ‘treat customers fairly’ and communicate in ways that are ‘clear, fair and not misleading’.

“The introduction of the Duty – and the shift to outcomes-focused regulation – represents arguably the biggest domestic regulatory overhaul in almost a decade and will fundamentally reshape financial services in the UK.

“The FCA explicitly says the Duty represents a higher regulatory standard than the current regime, with a renewed focus on ensuring all sectors adopt a laser-like focus to achieving good consumer outcomes.

“If the Duty works as envisaged, it has the potential to lead to better informed consumers buying products and solutions, and receiving communications that are more appropriate for their needs and circumstances.

“However, for this to be achieved the FCA will need to demonstrate a credible threat of enforcement against those firms who already flout its existing rules. It will also need to keep a close watch on claims management companies, some of whom will inevitably attempt to use the new requirement to chase spurious claims against firms.”

An opportunity to finally address the UK’s advice gap

“In addition, the Consumer Duty provides a platform for the FCA and the Government to finally address the thorny issue of the blurred line between guidance and financial advice.

“It is clear the regulator wants savers and investors to receive more support when making decisions about their money, with the FCA making it crystal clear that achieving ‘good outcomes’ is intended as a step-up in its customer support expectations.

“Firms stand ready to offer this extra support – and in the process help fill the so-called ‘advice gap’ – but the lack of clarity over when guidance ends and advice begins is holding the market back.

“Unless this is rectified, firms will continue to be limited in their communications with millions of customers.

“For those who don’t take regulated advice – either through choice or lack of access – this means they will be more at risk of making sub-optimal decisions, undermining one of the central aims of the Consumer Duty.”

Consumer Duty Q&A

What is the Consumer Duty?

The Consumer Duty will set a new standard for the UK financial services sector, requiring firms to ‘act to deliver good outcomes for retail customers’.

This new Consumer Principle (FCA Principle 12) will be underpinned by ‘Cross-cutting Rules’ setting out the FCA’s expectations of how firms should behave.

Specially, firms will be required to:

  • Act in good faith towards retail customers
  • Avoid foreseeable harm to retail customers
  • Enable and support retail customers to pursue their financial objectives

The overarching Consumer Principle and Cross-cutting Rules are intended to deliver ‘good outcomes’ in four areas:

  • Products and services
  • Price and value
  • Consumer understanding
  • Consumer support
Source: FCA

What is the Consumer Principle replacing?

Where the Consumer Duty applies, two existing FCA Principles will be disapplied:

  • Principle 6 (‘A firm must pay due regard to the interests of its customers and treat them fairly’, often referred to simply as ‘treating customers fairly’ or ‘TCF’)
  • Principle 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading)

Who will this affect?

The Consumer Duty will apply to all regulated retail financial services firms – from retail platforms to insurers and financial advisers.

Over time, the FCA expects retail customers to experience improved outcomes through the provision of more appropriate products, improved service and, ultimately, better overall outcomes.

When will the Consumer Duty come into force?

Given how extensively the FCA has consulted on the Consumer Duty, the implementation date is arguably the only major part of the reforms open to question.

In its last update in December 2021, the regulator suggested firms should have until 30 April 2023 to fully implement the Consumer Duty.

However, some have argued the proposed nine-month implementation period is too tight given the significance of the reforms and should be extended to two-years.

Does the Consumer Duty mean financial services firms will need to protect people from all financial harm?

No, the FCA has explicitly stated firms will not be required to protect consumers from all financial harm.

Specifically, the regulator says neither the Consumer Principle nor the Cross-cutting Rules will:

  • mean that consumers can or will be protected from all harm
  • impose an open-ended duty that goes beyond the scope of the firm’s ability to determine or influence consumer outcomes or protect consumers from all potential harms
  • remove the principle of consumer responsibility.

The FCA says the entire Consumer Duty will be underpinned by a concept of ‘reasonableness’, reflecting “the tortious concept of how a reasonable prudent firm would act and is one firms are already familiar with due to existing duties under common law”.

Factors affecting what would be ‘reasonable’ include:

  • The nature of the product or service being offered: how significant is the risk of harm? Is the product/service complex? Are costs or charges high?
  • The characteristics of consumers in the firm’s target market: are they sophisticated investors or novices who might be more vulnerable?
  • The firm’s role in relation to the product/service: what is your role in the distribution chain?

Part of the challenge in implementing the Consumer Duty is that concepts like ‘reasonableness’ are not explicitly defined (although the FCA has published guidance to help firms navigate the rules).

It will be up to firms and the FCA to determine what is or is not reasonable – and as such it is likely the Duty and its impact on the market will evolve over time.

What role will the Financial Ombudsman Service (FOS) play?

The way the Consumer Duty operates in the real world will depend on the regulator, the industry and the Financial Ombudsman Service (FOS).

The Ombudsman is independent of the FCA and deals with complaints from retail financial services customers.

It will therefore play a crucial role in interpreting the Consumer Duty and setting the boundary for what can reasonably be expected of firms when supporting customers.

Ensuring FOS rulings are in line with the FCA’s intentions will be crucial if the reforms are to work as intended.

How will this affect financial advisers?

The Consumer Duty will apply to regulated advisers in the same way as it applies to other retail financial services firms.

The FCA’s expectations of firms will vary depending on a number of things including proximity to the client and resources.

While many advisers – and indeed other firms – will already be meeting the FCA’s Consumer Duty standards, there will be a need to review processes and communications in light of the reforms.

How much will this cost to implement?

It is extremely difficult to measure the exact costs to the industry, although the FCA estimates one-off costs of between £688.6m and £2.4bn, and ongoing annual direct costs in the range of £74m to £176.2m.

The benefits of the Consumer Duty are expected to include:

  • improved matching of products and services to consumers’ needs
  • reduced need to seek compensation or redress
  • time saved
  • reduced psychological stress
  • reduced probability of individuals experiencing harm
  • enhanced customer confidence and participation in financial markets
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